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Rise of Robots: Boon for Companies, Tax Headache for Lawmakers

European lawmakers are grappling for answers to a question that until recently seemed
like the stuff of science fiction: If robots take our jobs, who will pay taxes?

In an age of unprecedented technological change occurring at a faster rate than the
Industrial Revolution, concerns over the growing robotization and automation of work
have prompted fears about mass unemployment and plummeting tax revenue in the near
future, pitting companies and robotics manufacturers against lawmakers and worker
advocates.

The issue is taking on new urgency ahead of a Feb. 16 vote before the EU Parliament’s
Legal Affairs Committee on whether to create a robotics agency to deliberate on tax
and liability issues.

Companies from Google to Boeing, from Siemens to Foxconn Technology Group, have jumped
on the automation bandwagon in the last few decades (Chart 1). At the forefront of
the robotization drive, which has been dubbed the “Fourth Industrial Revolution,”
are countries like Germany, the U.S., South Korea and the U.K. (Chart 2), and such
manufacturing industries as automotive parts suppliers and the electrical and electronics
industry.

For companies, the math is simple—use of robotics reduces their labor costs and increases
productivity as robots have become cheaper and easier to program. According to a 2013
article in the MIT Technology Review, warehouses equipped with robots manufactured by Amazon
Robotics, for instance, can process four times the amount of orders as unautomated
warehouses.

A Muddy Question

Robots—then still large, unwieldy and expensive—first entered the marketplace in Europe,
Japan and the U.S. in the 1960s.
Boston Consulting Group estimates approximately 1.4 million industrial robots are today in use around the
globe, a number that is projected to increase to 1.9 million in 2017. Robotics manufacturers,
unsurprisingly, are riding a sales boom, with many of them reporting two-digit percentage
increases in revenue (chart of Denmark’s largest robot manufacturer, Universal Robots,
revenue between 2013 and 2015). The robotics industry today represents a $15 billion
sector, which is expected to increase to $67 billion by 2025, also according to Boston
Consulting Group figures.

How many jobs will be lost in this inexorable drive toward automation is a question
that no one can quite seem to agree on.

A 2016
report by the Organization for Economic Cooperation and Development estimates the job loss
to be low, with 9 percent of jobs automatable on average across 21 OECD countries.
A 2013
report by Oxford University’s Carl Benedikt Frey and Michael A. Osborne meanwhile estimated
54 percent of jobs in the EU to be at risk of disappearing under the influence of
computerization in the next two decades, while a follow-up 2016
report pronounced 47 percent of US employment to be at high risk of imminent automation,
“perhaps over the next decade or two.”

Fair Taxation

The answer to this numbers question matters because the fear of massive job losses
is one of the central arguments used by those in favor of a robot tax.

“Who will buy products and services realized through use of robotics if those taken
out of a job by them have no income?” said Barb Jacobson, a board member of Universal
Basic Income Europe, a lobby group promoting basic income in Europe.

Noting in a Jan. 31 e-mail that the basic research resulting in new technology patents
is often funded with public money, she said: “It is only fair that those who profit
from the use of patents pay some of that back, and that the revenues from a ’robot
tax’ be shared by all in the form of a basic income.”

But rather than focusing on diminishing employment prospects, some say, we should
be examining the relationship between unemployment and automation.

“I think we need to have proper evidence that robots have a negative effect on employment
and right now we’re not really seeing anything in the data to suggest that,” said
Gregory Claeys, a research fellow at the Brussels-based think tank Bruegel, in a Feb.
3 telephone interview.

‘Problem Doesn’t Exist.’

This view was echoed by Patrick Schwarzkopf, director of the Brussels-based EUnited
Robotics trade association, who pointed to data (Chart 3)
from the International Federation of Robotics indicating high employment rates for
countries with high robotization levels.

“Empirically, the evidence doesn’t really show that high robotization means lower
employment. That’s the counterintuitive thing about it,”
he told Bloomberg BNA in a Feb. 1 telephone interview. “Introducing a robot tax is
basically a solution to a problem that doesn’t exist.”

Both robotics manufacturers and economists moreover tend to point out that automation
also creates jobs. A 2015 Deloitte
report for instance concluded that technology potentially played a part in the disappearance
of 800,000 lower-skilled jobs between 2001 and 2015, but also contributed to the creation
of almost 3.5 million higher-skilled jobs.

Jobs, Tax at Risk

Extensive studies by consultancy firms such as Deloitte, McKinsey&Company and Accenture
indicate that jobs in highly structured and predictable environments such as manufacturing,
transportation and logistics, as well as in office and administrative support are
most at risk of automation. In other words, the wide net of jobs most at risk of disappearing
includes assemblers of electrical products and bank clerks, typists and personal assistants,
retail cashiers and couriers, tax preparers and data entry specialists.

No matter their scope, sizeable job losses due to the automation of work are likely
to result in not just an idle workforce, but also plummeting tax revenues for governments
since companies, employing fewer people, would result in fewer social security and
income tax take, causing erosion of governmental tax bases.

A European Parliament report released in May 2016 was the first serious effort on
the part of European lawmakers to address these mounting concerns, discussing such
robotics-related issues as liability, compliance with ethical standards and the viability
of European Union countries’ social security systems if the current taxation basis
isn’t revised.

A resolution based on the report, submitted by the Parliament’s Legal Affairs Committee
and scheduled to be voted Feb. 16, calls for the creation of a European Agency for
robotics and artificial intelligence, and urges the European Commission to monitor
“new employment models and the viability of the current tax and social system for
robotics.”

A “yes” vote would require the commission to present a legislative proposal in response,
or state its reasons if it refuses to do so.

The May 2016 report was penned by European parliamentarian and member of the Group
of Progressive Alliance of Socialists and Democrats, Mady Delvaux.

She said it was important to both analyze all the possible scenarios and launch a
debate on new employment models and the sustainability of European countries’
tax and social systems in light of robotics developments.

“Taxing the work of robots is definitely not necessary at this stage and probably
not even in the near future. But it is crucial to reflect on it and I want Europe
to be prepared in case we are facing job displacement by robotics in the future,”
she said in a Feb. 9 statement e-mailed to Bloomberg BNA.

Micro Payments

Benoit Hamon, a Socialist Party candidate running for the French presidential elections,
would beg to differ. Citing figures that projected a loss of 3 million jobs due to
automation in France by 2025, he recently called for the introduction of a robot tax
to fund a 750-euro ($799) basic income. His office didn’t respond to requests for
comment.

Such a robot tax would kill many birds with one stone, said Paul Miller, chief executive
officer and founder of the London-based consultancy Digital Workplace Group. “If the
tax take is only from corporate tax paid based on profits, then this is subject to
all the myriad smart avoidance and minimization methods we see today,” he said in
a Feb. 1 e-mail. “Taxing software means that as well as corporation tax, there is
a new version of ’tax at source’ and micro payments are received in real time by the
tax authorities.”

Tax and BEPS

Practitioners say lawmakers like Hamon raise pertinent questions about the need for
a rebalancing of the tax system as robots increasingly begin to execute tasks that,
until recently, were performed by humans. But, they warn, a levy that taxes companies’
use of robotics will be difficult to design and tricky to implement because it would
require a practical and workable definition of “robots” and a clear-cut method of
assigning profits to a particular robot or automation program.

Carlo Gagliardi, a U.K.-based partner at PwC Strategy, and John K. Steveni, U.K. tax
communications leader and tax digital leader at PwC, said the chief challenge would
be to establish a definition for the types of robots that ought to be taxed “which
can survive contact with the real world.”

“Where does the value sit in a robot? Is it in the hardware or the software learning
algorithms? This is a part of the BEPS issue on where businesses should pay tax,”
they said in a Feb. 2 e-mail, referring to the OECD’s sweeping action plan to combat
base erosion and profit shifting.

Others warned that the difficulty of designing a workable definition for robotics
and determining where they create value would increase uncertainty for the companies
leading the automation charge.

“My everyday experience of dealing with corporate clients is that the biggest problem
of taxes for them isn’t actually the amount of it; it’s not knowing how much they
might have to pay,” said Robert Leggett, a partner at Ensors Chartered Accountants,
in a Jan. 31 telephone interview.

A robot tax would further compound these uncertainties because the amount in profits
a robot generates for a taxpayer and the corresponding number of human workers displaced
won’t always be “obvious”, he said.

“So you’re going to almost have to come up with some much more arbitrary way of deciding
what that tax is, and I’d be very worried that if that’s not absolutely clear, you
get into certainty for the business that doesn’t actually know how much tax it’s going
to have to pay,” he said.

Harm Economic Growth

Practitioners, industry groups and economists have warned that a robot tax would also
reduce the incentive for companies to innovate and potentially prompt them to relocate
to other jurisdictions that don’t levy taxes on automation technologies.

“Taxing robots would increase the cost of automation in some industries,” Carl Benedikt
Frey, who leads research on robotics at the University of Oxford, told Bloomberg BNA.
“Although it might incentivize companies to rely on cheap labor instead in certain
cases, such a tax would be harmful to economic growth.”

The road ahead might look uncertain, Gagliardi and Steveni added, but European countries
should only consider running with Hamon’s idea if they can come up with a tax definition
of a robot that isn’t so broad as to include all machines, or so narrow as to require
constant revisions as technology evolves.

“The tax system will need to adapt and the current tax share between labor and capital
may well need to change, but at the detailed policy level trying to define and tax
robots does not look like a practical answer.”

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